Telstra Corporation: Pedaling hard to catch the next cycle
About the author:
- Author name:
- By Nick Harris
- Job title:
- Senior Analyst
- Date posted:
- 29 November 2019, 3:37 PM
- Sectors Covered:
- Telecommunications, Technology and Financial Services
- Commentary from TLS’s investor day, combined with catalysts expected in the
next six months and our observations on the overall Telco market, increase our
confidence that FY20 is ‘bottom of the cycle’.
- Our observations on market share movements over the last six years combined
with more recent price increases in fixed and mobile plans are charted overleaf.
- These reaffirm our view that a cyclical improvement in underway and TLS is best
positioned to benefit from improving industry economics and cost out.
- We make no changes to our forecast, and maintain our Add recommendation (Morgans clients can login to view detailed reports & price targets).
Our key takeaways from TLS’s investor day were:
- FY20 guidance is reaffirmed
(pleasingly, conditions have not deteriorated further).
- Conditions have actually improved
(from a leading indicator perspective).
- The key leading indicators for mobile and fixed
(current plan prices or as TLS now call this Transacting Minimum Monthly
Commitment/TMMC) have trended higher since June 19 (TLS branded postpaid mobile
ARPU is up $2-$3 and TLS branded NBN ARPU is up $1).
- These leading indicators will
take ~12-18 months to flow through, and hence postpaid handheld ARPU is expected to
decline in 1H20 by a greater rate than 2H19, with the decline moderating in 2H20. NBN
ARPU is also expected to decline in FY20. A greater percentage of lower ARPU Belong
customers in NBN and mobile will also drag ARPU lower in FY20.
- Higher TMMC will
drive mobile gross margin expansion over the next 12 months. Mobile is TLS’s largest
EBITDA contributor (at ~30% of FY19 EBITDA). Higher TMMC and accelerating 5G
subscribers (from mid-late CY20 when Apple’s 5G iPhone is likely launched) could mean
TLS returns to mobile EBITDA growth in FY21, after several years of EBITDA decline.
- Product simplification is going well with consumer/SMB plans down from 1,800 to 20 and
enterprise plans down from 650 to 488.
- TLS is running ahead of plans for their 5G
mobile network expansion and their 5G network superiority (measured in speed) has been
- Previously mentioned cost out targets remains on track.
Focus back onto InfraCo
InfraCo, as a standalone business unit, is just over 12 months old and progress is being
made to mature its commercial relationship with Telstra retail (the rest of the TLS
business). Reasons for TLS spending time on InfraCo are:
- It’s an important asset class
and should be valued differently (we view every dollar of InfraCo earnings as being worth
80% more than every dollar of retail earnings).
- Improve operating efficiencies in the
- Creating optionality for TLS InfraCo in a post NBN world. There
are currently no plans to split the business but this could change over time.
Investment view – Add
We make no changes to our forecast, price target or Add recommendation (Morgans clients can login to view detailed reports & price targets).
Our view is
that FY20 is the trough year.
The cycle is already improving and there are a number of
potentially positive catalysts on the horizon with ~75% of fixed line households on the NBN
by December 2019 and the TPG/Vodafone merger ruling due in February 2020.
Morgans clients can login to view our detailed report and share price target for Telstra Corporation (TLS). Alternatively, please contact your Morgans adviser or nearest Morgans office for access.
Disclaimer: Analyst owns shares. The information contained in this report is provided to you by Morgans Financial Limited as general advice only, and is made without consideration of an individual's relevant personal circumstances. Morgans Financial Limited ABN 49 010 669 726, its related bodies corporate, directors and officers, employees, authorised representatives and agents (“Morgans”) do not accept any liability for any loss or damage arising from or in connection with any action taken or not taken on the basis of information contained in this report, or for any errors or omissions contained within. It is recommended that any persons who wish to act upon this report consult with their Morgans investment adviser before doing so.
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